Sri Lanka will bring legal reforms to encourage much needed foreign investment, as the cash-strapped island tries to turn its $8 billion Chinese debt into equity, the prime minister said Sunday.

Ranil Wickremesinghe, who returned home Sunday after a three-day visit to China, said streamlined regulations and a free trade agreement would be in place to increase economic ties with Beijing.

"The Chinese are interested (in investing) and are awaiting our (new) laws," Wickremesinghe said, adding that he was hoping to unveil an economic master plan with a regulatory framework by June.

He said the Chinese would be offered equity stakes in loss-making projects -- a second international airport and a deep sea port in the island's south -- commissioned by former strongman president Mahinda Rajapakse.

"We are setting aside an area of 1,000 acres (400 hectares) as a special investment zone for Chinese companies to set up operations in Hambantota," the prime minister said, referring to an area where the white elephant projects are located.

The two ports could be viable for big logistics companies, Wickremesinghe said.

He played down a controversy over a $1.4 billion land reclamation project in Colombo known as Port City, which is being built by a Chinese company.

The state-owned Chinese firm had demanded $125 million as compensation from Colombo for suspending work soon after President Maithripala Sirisena came to power in January last year. Wickremesinghe said the compensation claim was not raised during his visit.

The new government held up work pending the resolution of several issues, including environmental concerns and reports that neighbouring India feared the Port City could lead to China getting a military foothold in its backyard.

However, Wickremesinghe said Port City was not a threat.

"The Port City is not a threat to anyone, it's an opportunity for everyone to make money," he told reporters on Saturday.

The land reclamation represents the biggest single foreign investment received by the island, adding 233 hectares (575 acres) of real estate in the congested capital.

The mega project was initiated by Chinese President Xi Jinping in September 2014 and is expected to include real estate, a marina and a business district.